P2: Methodology for (Re)-Reading Keynes

The first post on Reading Keynes provided an outline of the reasons why this is a good idea. It is clear that economics is broken. We need a new macroeconomics for the 21st century, one which can solve the massive problems which humanity as a whole is facing on political, social, economic, and environmental dimensions. Keynes faced similar problems, and found solutions which guided economic policy in the mid twentieth century. It is always useful to absorb the insights of our predecessors, before trying to build upon them. Such a methodology is essential for the advancement, progress and accumulation of knowledge. Our current stock of human knowledge is based on the collected insights and labors of hundreds of thousands of scholars, accumulated over the centuries. We would return to the stone ages if we were to reject it as being full of contradictions and errors (which it is). Instead, progress occurs by absorbing the past accumulated wisdom, and trying to remove the errors, or add missing insights, building on our heritage, rather than discarding it and starting over from scratch.

Several of the central Keynesian insights into the causes of the Great Depression never made it into the economics textbooks. However, our goal in studying Keynes goes far beyond just the re-discovery of these lost Keynesian insights. A central goal is to apply and illustrate a radically different methodology for studying economics in particular, and social science in general. This is derived from a study of The Methodology of Polanyi’s Great Transformation. This is an extremely important point, which we proceed to amplify and explain further. Read More

It might also be a good idea for those who have not read anything by Herman Daly, to read at least one of Steady State Economics, For the Common Good (with John Cobb) or Beyond Growth. For those who have, re-reading at least one or two of Daly’s more recent short commentaries on the state of economies and of economics, would be very useful. For those with more time, reading (or re-reading) J S Mill, K E Boulding, E J Mishan, E F Shumacher and Nicholas Georgescu-Roegen would be a pretty good use of that time too. Remarkably also, a careful re-reading of Smith and Ricardo, will show how modern Ecological Economics has, if anything, more, fundamental continuity with the best and most durable elements of Classical Economics than does so much of Neo-Classical Economics. I don’t believe that any of Marxist, Neo-Classical or Austrian Economics, nor Keynesian Macroeconomics (in the sense that it is the economics of Keynes, rather than simply the IS-LM simplification) are unimportant or not worth studying. Each of these traditions provides very valuable insights. But we need surely, to integrate the valuable insights from these traditions more intelligently, and more boldly discard the chaff. There is also, no escaping the key Daly-ite proposition – the human economy is a subsystem of a finite global biophysical ecosystem, and attempts to ignore or exceed the limits of that ecosystem are dangerous in the medium term and futile in the long-term. So any defiantly UN-ecological Economics, is ultimately, just Delusional Economics.

More study! Never a bad thing but it diverts us from solving problems that we know exist and using solutions that we know are available to us.

The more that a country allows the private sector to create its money supply, the more tax dollars are transferred to the wealthy through debt service charges paid by taxpayers thus limiting fiscal options available to the government. That also incrementally increases income inequality decreasing governments’ ability to ameliorate the problems created by unfettered capitalism.

Money is perpetual non-interest bearing debt when printed but, when it is in the form of credit from private lenders, money is perpetual interest bearing debt requiring further pillaging of the planet’s resources to pay the interest. The following quote bears reading.

“As every environmentalist knows, over the last few centuries we humans have created an ecologically unsustainable industrial economy. Unless we radically reform our way of doing things and create a sustainable economic system we are doomed to suffer drastic changes.

“What most environmentalists – and indeed most economists – do not know is that over the last few centuries we humans have also created an economically unsustainable financial system. Unless we radically reform this financial system it will recurringly break down and thwart our efforts to heal this planet.

“Our current financial system diverts us from our real problems to ask: ‘where is the money going to come from?’ This should be the least of our worries. As long as we have vast unmet human needs and idle human and nonhuman resources … finance should never be allowed to stand in the way of doing what must be done.

“Could anything be more insane than for the human race to die out because we ‘couldn’t afford’ to save ourselves.”

Dr. John Hargrove Hotson, Emeritus Professor of Economics, University of Waterloo and co-founder of COMER. 1993 [25-1-1930 to 21-1qq1996]

I absolutely agree, but what is your alternative to [monetary] “credit from private lenders”? We won’t go anywhere unless we have somewhere to go, and we won’t have that until we are prepared to go beyond agreeing we want a “sustainable economic system” to being willing to compare and evaluate logically possible alternatives to what we have that other people put forward.

antireifier

November 22, 2016 at 9:49 pm

Either a gradual or all or nothing approach. A gradual approach might be to stop government borrowing from private lenders and borrow from the central banks. But evaluate that and see how well it is working. Then look at what is called helicopter money for government infrastructure spending. Look at broadening that to programmes especially income support. Build in evaluation every step of the way. But what would be wrong with convening a conference to start discussing that? I do not pretend to have all the answers but this could be a start. The real issues is who gets to create money. There are some who believe any private money creation will lead to problems so that all money should be perpetual non-interest bearing government-created debt. We have computers powerful enough now to model the impact of such approaches. But at least we should be talking about it.

I agree dialogue is more likely to be productive than study, although how to involve late dissidents like Keynes in the debate other than by widespread study? In respect of a gradual versus all-or-nothing approach, I think we need to distinguish theory and practice. The basis of theory can change completely, yet livelihoods need to change gradually to give people time to learn, evaluate and readjust.

As I see it, one issue is indeed who gets to create the money, but what is the right answer to that depends on what money is. If (as both the evidence and logic suggests) it is no more than a form of IOU, why should anyone other than ourselves be allowed to create it, as we effectively do when we purchase with a credit card? (How much we are allowed to borrow should depend only on our (or our work’s) needs and repayment (or progress) record, but that’s another issue). The credit card system can be interpreted as Hazel Henderson’s “gift economy” if one likens it to hitch-hiking, repaid in goodwill and by giving lifts oneself when one can.

But Michael Barkusky (ecolecon) below is right: if we get rid of the profit motive we still need motivation. I see that in the work being worth doing (thinking of hospice charities and railway preservation societies here in the UK), the pleasures (for most people) of working with others, the challenges of prize-winning (as for the best flowers or vegetables), and the satisfaction of post hoc appreciation (Ruskin’s “Crown of Wild Olive”, as vaguely realised in our honours system and awards for long or honourable service – these including pensions). When someone inspires a company which produces socially beneficial goods (famously like the “cats-eyes” which highlight the middle of roads), no-one begrudges them a comfortable living and everything they need. The same cannot be said now for financiers who close down important enterprises in order to waste monetary profits on pushing up the price of other people’s IOUs.

“As long as we have vast unmet human needs and idle human and nonhuman resources … finance should never be allowed to stand in the way of doing what must be done.”

“Could anything be more insane than for the human race to die out because we ‘couldn’t afford’ to save ourselves.”

The two tricky points in this, though seem (to me anyway) to be these two, and they are broader issues than simply the issue of how we create money:

1. Although I think we know all too well what idle human resources look like, we still need good working definitions (that I’m not sure we have yet) for various kinds of “idle nonhuman resources” – and there is pronounced natural-science element to defining those properly and computing the maximum sustainable yield obtainable when they are pressed into service of meeting human needs

2. We also need to think through our organizing principles for mobilizing human resources – how we either motivate entrepreneurs to do, in pursuit of profit, what is necessary to get done but which is not, at present, profitable for them to do; or (and perhaps concurrently) free ourselves of the tyranny of the profit motive to a greater extent, by organizing collective action independently of that motive. When we bypass “the market” and use the latter approach, which we will undoubtedly need to do to some extent, we need great creativity to replicate what competitive entrepreneurial capitalism has often done well, and that state enterprise has historically, by and large, done rather less well – namely induce premium effort by the human resources engaged in any large project, and provide strong incentives for the efficient (in the sense of non-wasteful) use by human agents, of all the necessary non-human inputs.

1. I don’t think there is any consensus on ‘what idle human resources look like’. To a large extent I might be an example of what they look like to most people, but i view myself as only partially idle, and also super-busy but overstretched due to lack of resources (which is why i am partially idle — totally stressed and fatigued.

Well known Indian economist Pars Dasgupta discussed why many poor Indians are very low-productive—they dont have enough to eat, live on poverty wages, etc. Another economist S Benhabib and others discuss ‘poverty traps’. The economic system operates using this — in physics its called ‘the slaving principle’ (H Haken) or ‘center manifold theorem’. its a sort of a nonequilibrium thermodynamical ‘heat engine’ (burn up wood, or people).

2. Alot of ‘idle nonhuman resources’ have preliminary definitions (eg natural capital, Constanza and Daly), social,cultural, intellectual and intangible capital. Many of these now are not ‘monetarized’ so they are ‘externalities’, or ‘free goods’ or ‘free stuff’ (Trump)..

A few attempts are made to monetarize them by using Time Banking or alternative currencies eg ‘ithaca hours’ or ‘ https://dctimebanks.org ‘ or bitcoins, blockchain

. . My experience with these is they don’t work—the people who promote and organize them don’t use em, some are corrupt–they create a local currency but to get it you have to buy it, and all that money goes in their personal bank account.
Others want labor exchanges—1 hour of your labor earns one hour of mine, which means you fix up my house for 10 hours, and in exchange I will make you 10 cups of coffee in 10 hours. eve/en/st. even.

3. Most of these issues are social psychological. (or, behavioral economics—eg dan ariely—he teaches people how to avoid irrational decisions due to pre-programmed biases. but he also makes money advising fortune 500 companies on how to make money using the fact that humans are irrational.)

I once talked to H Daly over the phone about grad school—he said ‘we don’t have any money or grad positions’. He referred me to someone else, who said same thing. They do have money to fly to conferences all over the world repeating the same speech.
I bet they would decide my ‘idle resources’ could be used to bring them a coffee in the airport lounge.

I think Peter Victor was or is ‘state of the art’ in ecological economics—but its just a good review of what everyone knows who follows the field. https://www.pvictor.com or http://www.petervictor.com Stern Review and Nordhaus of Yale also have views.

Does economics solve problems? I don’t think so. Problem-dolving in complex systems such as human societies requires an ensemble of purposes. principles and organisational skills to pursue, agreed ends. some of which will be economic. Others of at least equal importance and complexity would be ecological, social and political.

Trying to solve the huge complexities of the challenges facing us with the very limited concepts and methodologies of any branch of economics is a recipe goe continuing disaster.

Email subscription to this blog

RWER 26,498 subscribers

Real World Economics Review

The RWER is a free open-access journal, but with access to the current issue restricted to its 26,498 subscribers (07/12/16). Subscriptions are free. Over one million full-text copies of RWER papers are downloaded per year.

—- Forthcoming WEA Paperbacks —-

———— Armando Ochangco ———-

Shimshon Bichler / Jonathan Nitzan

————— Mauro Gallegati ————–

————— Herman Daly —————-

————— Asad Zaman —————

—————– C. T. Kurien —————

————— Robert Locke —————-

Guidelines for Comments

• This blog is renowned for its high level of comment discussion. These guidelines exist to further that reputation.
• Engage with the arguments of the post and of your fellow discussants.
• Try not to flood discussion threads with only your comments.
• Do not post slight variations of the same comment under multiple posts.
• Show your fellow discussants the same courtesy you would if you were sitting around a table with them.